What Happens to Retirement Savings during a Bankruptcy?

Filing for bankruptcy won't put your retirement savings in jeopardy if those retirement savings fall into specific classes of retirement accounts that are exempted by law. However, not everything you may have planned to help in your retirement, or that you count as retirement savings, might be protected. The following information explains what bankruptcy is, what types of retirement savings are protected and some types of savings that might not be.

Understanding Bankruptcy

Bankruptcy is legal protection from people you owe. By filing bankruptcy, your assets are put under the control of a court-appointed trustee. The type of bankruptcy protection you have chosen, Chapter 7 or Chapter 13, will affect what happens to your assets. In Chapter 7, your assets are liquidated and divided among your creditors by the trustee, and then you are free from any further attempts by them to collect from you. In Chapter 13, you submit a reorganization plan to the trustee in which you receive temporary relief from your creditors as you work out a plan to resume paying what you owe.

In either Chapter 7 or Chapter 13 bankruptcy proceeding, certain components of your retirement savings accounts are exempted.

Your IRAs

If you have an Individual Retirement Account, the value of that account, up to $1 million, cannot be claimed by the trustee for disbursement to creditors. These retirement savings are not counted in your assets. An Individual Retirement Account allows you to contribute a stated amount each year into the account. If the money in the IRA grows over time, you do not pay taxes on that growth until you withdraw it. You cannot withdraw from an IRA without penalty prior to age 59 and a half. Other types of IRAs, depending on your income, allow you to deduct your contribution. Your IRA can be a savings account, a mutual fund account, almost any kind of investment account. Regardless of the type of investment account underlying the IRA, it is not counted among your assets for bankruptcy purposes.

Employer-Sponsored Accounts

Many employers help employees build retirement savings by offering employer-sponsored retirement accounts, often called a 401(k) or Keough plans. Some of these plans are funded by the employer, some by the employee and some by both. Regardless, the assets in these plans are not considered part of your estate and therefore cannot be claimed as your assets in bankruptcy.

What Isn't Protected?

In addition to employee-sponsored plans and Individual Retirement Accounts, many people have taken steps to increase their assets at retirement on their own. For instance, some make contributions above the Individual Retirement Account limit to an investment account that is not tax-deferred. Some people buy really estate. Others invest in businesses. Even if you declare that the sole purpose of such investments is for your retirement savings, they will not be excluded from your assets for purposes of bankruptcy.

Counting the Costs

While bankruptcy will not affect your protected retirement savings, be aware it can be a costly process in terms of filing, attorney fees and impact on your credit rating.


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